London ends up slightly; retail is key

Bank of England keeps interest rates steady at 4.75%

KabirChibber

LONDON (MarketWatch) -- U.K. shares ended higher Thursday as the Bank of England kept the benchmark interest rate unchanged at its last rate-policy meeting before the May 5 general election.

London's benchmark FTSE 100 Index (UKX) finished up 0.6% to 4,977. French and German stocks also ended higher. See Europe Markets.

Expectations had been building for a rate hike in the second quarter after two members of the rate-setting Monetary Policy Committee voted for a rise last month, but recent weaker-than-expected retail sales raised concerns on consumer spending. U.K. rates were held steady Thursday at 4.75%.

Peter Dixon, an economist at Commerzbank, said he doesn't see rates being raised for the rest of this year.

"There are questions about the strength of consumption in the U.K., which we should see develop in the third and fourth quarters," he said. Dixon expects the economy to gain momentum towards the end of 2005, with a hike in rates in early 2006.

Klaus Baader, an economist at Lehman Brothers, said his firm believes rates may have peaked, and actually expects a decrease in rates by the end of the year. See London Calling.

Expectations for a continued rate freeze were boosted by data Thursday showing manufacturing output in the U.K. fell 0.5%, against expectations of a 0.1% rise.

Supermarket retailers were in focus after data on market share and as pharmacy Boots (BOOT) said it will sell a division.

Tesco (TSCO), the U.K.'s biggest supermarket, closed up 0.2% after choppy trading as it extended its market share over its rivals to a record of 29.5% in the 12 weeks to March 27, up from the previous record of 29.2% last month, according to the market research firm Taylor Nelson Sofres.

Troubled supermarket retailer J Sainsbury (SBRY) shares added 0.3% at the close as it saw its market share decline to 15.9% from 16% in February, its first decline in seven months.

WM Morrison's (MRW) shares added 0.1% as its share of the 17 billion pound U.K. supermarket retail market remained flat at 12.6%,. It said it has agreed to dissolve the partnership between BP and Morrison's recently acquired Safeway stores operation.

Morrison said that the 61 petrol filling sites and convenience stores operated by the partnership will be divided between BP and Safeway.

At Jan. 30, the book value of Safeway's interest in partnership-related net assets was 67.4 million pounds, Morrison said

Shares in rival supermarket chain Somerfield (SOF) gained 1.3% as the Financial Times reported that property group Topland is considering a bid. The group likes Somerfield's property assets, which may be worth more than 1 billion pounds, it reported.

Also in the retail sector, the advocate general of the European Court of Justice backed Marks & Spencer's (MKS) view that it should be allowed to deduct some of its foreign losses from its U.K. tax bill in his legal opinion to the court.

Marks & Spencer has taken the British government to court over its tax bill, with the governments of most Western European countries backing the U.K. stance. If the U.K. loses, it could cost European Union governments billions in lost tax revenue.

The advocate general's opinion isn't binding to the Court but the court follows his view in about 80% of cases, the Wall Street Journal reported.

Shares in Marks & Spencer rose 0.4%.

Boots higher on planned sale

Pharmacy retailer Boots Group (BOOT) declined 0.7%, after earlier leading gainers, as it said "lower consumer spending and infrastructure costs" are expected to lead to lower operating profits at its Boots The Chemist chain next year.

It reported same-store sales in the fourth quarter fell 0.9% at its BTC chain, reflecting the "general slowdown" in U.K. retail.

Investors had earlier welcomed plans to sell its Boots Healthcare International division this year and return a "significant proportion of the proceeds" to shareholders.

One analyst told MarketWatch the market will expect BHI to be valued at between 1 billion pounds to 1.25 billion pounds.

The retailer also plans marketing 300 of its smaller stores for sale and leaseback. Expected proceeds of 250 million pounds will be used to pay down short-term borrowings.

Low-cost U.K. airline EasyJet (EZJ) jumped 4.3% as it said passenger traffic in March rose 28.9% on the year to 2.6 million as its load factor, a measure of passengers to available seats, increased 4.3 percentage points to 86.9%.

Ad agency WPP Group (WPP) gained about 2%. It was upgraded to outperform from neutral by Credit Suisse First Boston. "This reflects our more optimistic view on the company's organic growth prospects relative to its agency peers but also compared to the European media sector as a whole," the broker said.

Venture capitalists 3i Group (III) slipped 0.5% in volatile trade as it said it plans to sell its legacy portfolio of around 800 minority investments to bolster profits, The Times (of London) reported.

The portfolio includes companies like Cannon Avent, which makes baby items and car mats. Analysts have valued the portfolio from 500 million pounds to 1 billion pounds, the report said. The sales are seen taking around two years to complete.

Building materials supplier Wolseley
WOS
(WOS) fell 0.3% as it said it bought three distribution businesses in Europe and North America for around 37 million pounds in cash. It said it has spent 259 million pounds on eighteen acquisitions this year.

"In the absence of an increased cash offer from (rival bidder) Elevation, the board recognizes that while there are certain key risks for Eidos shareholders in accepting the Sci Offer, the current implied value of the Sci offer of 72.8p per Eidos share... represents a significant premium to Elevation's offer," it said.

Sci shares plunged 6%.

Specialist banking group Investec (INVP) jumped 3.9%, after saying it expects to report fiscal 2005 adjusted earnings per share in a range of 135 pence to 143 pence, compared with 103.8 pence last year. Operating fundamentals continue to show positive trends, the company said.

Auto, leisure and cycling retailer Halfords (HFD) rose 1.2% as it said comparable sales rose 8.9% in the year to April 1 compared to a year ago. Halfords said it achieved sales growth across all four of its key categories, whilst continuing to focus on controlling costs. The board said it expects to report results in line with expectations.

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